NEW DELHI: Japan's diversified trading company Mitsui & Co is buying an additional 25% stake in active pharmaceutical ingredient maker Arch Pharmalabs for Rs 372 crore, a move that will raise its shareholding in the Mumbai-based privately-held company to 30%.

Mitsui is buying out the stakes of IL&FS Trust Co, IDBI Trusteeship Services and Rainbow Fund, according to an application to the FIPB.

The deal will increase the stake of foreign investors in the Indian company to 46%. Arch said the stake sale is to pave way for the exit of the three private financial investors, which have invested in the company since 2003-04. "Though an initial public offer could have been an option, we thought market conditions wouldn't permit that," said Ajit Kamath, chairman and MD of Arch Pharmalabs.

The pharmaceutical ingredient manufacturer opted for stake sale to Mitsui because the Japanese company was neither a "non financial nor non pharma" investor and avoided a possible conflict of interest with its existing customers, said Kamath.

Arch Pharmalabs mainly makes active pharmaceutical ingredients and intermediates, the main chemical used in making medicines. It also provides contract research and manufacturing services (CRAMS) to other drug makers for a fee.

Mitsui is one of the world's most diversified conglomerates with interests across trading, investment and service enterprise. It is also engaged in product sales, logistics and financing. Mitsui also has a significant stake in an API company in Japan and a formulations facility in China.

Kamath said Mitsui would represent Arch Pharmalabs' exclusively in Japan for both its generic and CRAMS business.

The deal was among the eight pending foreign direct investment applications cleared by the Union Cabinet last week, with the rider that they have to adhere to the new guidelines. It had not disclosed details of the transaction.

As per the new conditions for foreign investors buying into Indian drug companies, Mitsui must maintain the production level of essential drugs for five years at the highest annual production level of these drugs in any of the three years preceding the purchase of the Indian company. The buyer must also invest an equal amount in research and development, the highest level in the three preceding years prior to the sale of the local firm.

In February, Arch Pharmalabs had sought the FIPB's nod to sell 2% stake held by Indian investors to Cyprus-based Indus Kamdhenu Fund but withdrew it before the matter was examined by the approving authority. In May, it filed a revised application to divest its stake to Mitsui.